# Bollinger bands formula: Let’s break it down Before you move on to Bollinger bands formula, here is a bit about it,

Bollinger bands are a technical analysis tool that consists of a simple moving average (SMA) and two bands drawn above and below the SMA. The bands are calculated as a function of the standard deviation of the data being plotted. The purpose of Bollinger bands is to provide a relative definition of high and low prices of a security. By definition, prices are high at the upper band and low at the lower band. The bands are self-adjusting: as prices fluctuate, the bands widen and narrow.

The formula for calculating Bollinger bands is as follows:

Upper Bollinger Band = SMA + (2 * standard deviation) Lower Bollinger Band = SMA – (2 * standard deviation)

Where:

• SMA is the simple moving average
• standard deviation is a measure of the dispersion of a data set from its mean

For example, if you want to calculate Bollinger bands for a stock using a 20-day SMA and 2 standard deviations, you would first need to calculate the 20-day SMA for the stock. Then, you would need to calculate the standard deviation of the stock’s prices over the same 20-day period. Finally, you would use the SMA and standard deviation values to calculate the upper and lower Bollinger bands as shown in the formula above.

Bollinger bands can be used to identify trends and patterns, as well as to set up trades. For example, if the price of a stock is consistently touching or crossing the upper Bollinger band, it may be considered overbought and ripe for a sell trade. Conversely, if the price is consistently touching or crossing the lower Bollinger band, it may be considered oversold and ripe for a buy trade.